Organic is a buzzword these days. Everything from paper products, produce, beer, and textiles can be labeled organic. But what does organic really mean? Organic refers to the “methods that produce or involve production without the use of synthetic fertilizers, pesticides, or other artificial agents.” Why does this matter? Because organic products are thought to be healthier than conventional products. So, should you make your business organic?
Yes! By adopting organic standards, you can increase the health of your business. How does this happen? By avoiding artificial growth agents, pesticides, and synthetic fertilizers. This post contains three tips businesses can follow to make the leap to organic: promote from within, fund your own growth, and adopt a family business mindset.
HIRING AND PROMOTING ORGANICALLY
The first step toward an organic business is avoiding the harmful turnover practices that erode your business’ culture. You do this by developing a hiring and orientation process and by promoting leaders and middle managers from within. Aside from limiting turnover, there are two other benefits of developing a hiring process and promoting from within:
Culturally, standardized hiring and promotion processes help acquire and retain individuals who reinforce your mission, vision, and values.
Operationally, promoting from within increases leadership’s understanding of the nuances of processes and procedures and retains institutional knowledge. Leaders with field knowledge can make a better decision more quickly. When leaders don’t have this understanding, a disconnect can occur between what actually works in the field and what leadership thinks SHOULD work in the field.
One of the best examples of promoting from within is demonstrated by Publix Supermarkets. At Publix, one of the common refrains you hear from managers is, “I started as a bagger x number of years ago.” It is a badge of honor they wear, but it’s also a great recruiting tool used to get young professionals to own the vision and values and make Publix a career. Without exception, every associate receives a job in an entry-level position. Even experienced ex-managers from other grocery chains are required to work in each customer service position before being promoted up the ladder. It’s no wonder why Publix is one of the largest grocery chains in the US and consistently ranked on Fortune’s 100 Best Companies to Work For list.
It’s impossible to have the conversation about growing organically without also discussing ways that companies can fund growth. Increasing net margins, bank lending, mergers, loans from friends or family, SBA loans, etc., all serve the purpose of securing funding for the next stage of your business. But which method is best? How do you know what strategy is best for your business? There are are certain strategies that are less “artificial” for funding growth than others.
Increase Net Margins
The all natural, non-GMO, method to funding growth is hitting 10-15% net margins. This concept popularized by Greg Crabtree’s in his book Simple Numbers Big Profits, is the idea that 10% net margin is the minimum necessary to have capital leftover to invest back in the business. Unfortunately, there is no magic wand one can wave over a business to make it comfortably profitable. There needs to be a plan. Simple steps to increase your bottom line include:
Cutting down on unnecessary expenses. Yes, your customers and operating partners might really enjoy sports, but do you really need season tickets?
Setting up a salary cap. A salary cap is Crabtree’s idea of working backward to determine the max you should be spending on O/H labor in order to achieve 10%-15% net pre-tax margins
Increase prices. There are many reasons to raise prices: keeping up with inflation, higher cost, increasing your perceived value, and most important, positioning yourself in the competitive market. Additionally, all else remaining constant, raising prices results in a direct increase to the bottom line. When is the last time you raised your prices?
Line of Credit.
Another source for financing growth is a line of credit (LOC). The benefit of a line of credit is its low impact on a company's operating fitness and its low cost. Cost can remain low on a LOC because unlike a long-term loan, interest is calculated only on the amount utilized. However, anytime a business uses the money it didn’t generate - its artificial. Therefore, it’s important to be wise when tapping into a LOC. We don’t recommend utilizing a LOC to fund payroll or other overhead expenses. Possible uses for a line of credit are:
Accounts payable associated with cost of goods sold. A line of credit can be used to increase raw material or inventory purchases that will be converted into sellable goods that will generate cash.
Increased accounts receivable. Revenue growth usually results in larger accounts receivable, and funds from a LOC can help bridge the gap until those new customers start paying their invoices.
Revenue generating payroll positions. Hiring new salespeople entails a period of training and draws until they get up to speed. A LOC can enable you to onboard these positions, but you must be diligent to make sure they stay on track and begin generating a return on that investment.
Lastly, leveraging institutional knowledge is a great way to move toward organic growth. Family businesses seem to have inherent qualities that qualify them for the “organic business” label and many times it is their institutional knowledge that sets them apart. They utilize the wisdom of prior generations, current generations rely on the tried and true methods and processes developed by their predecessors , and the future generations are groomed under a well accepted set of company values. When these things happen, wisdom capital grows.
This is the wealth of information that accrues in any business over time. As generations endure up and down seasons, they’ve learned what works and what doesn’t. This creates a distinct advantage for future operations because problem-solving and decision making can be done efficiently. But this doesn’t just result in operational efficiencies. Culturally, wisdom capital results in vision and values affecting how things get done as much as (or potentially more than) standard operating procedures.
An example of this can be seen in Goodall Guitars. Since 1972, James Goodall has been building guitars with one goal, “Acoustic Excellence.” During his process, which you can watch here, Goodall explains how over time he’s manufactured tools to build and piece together components to avoid using excessive internal bracing which dampens the “tonal quality” of his concert grade instruments. It is here, in the refinement of a component that cannot even be seen, that we understand the attention to detail required by a standard of “Acoustic Excellence.” And in true family business fashion this wisdom capital is being passed down to his son.
An important caveat is that in a growing business this institutional knowledge must be captured. Information must be stored in playbooks, recorded in processes, and taught to the “next generation” before it can become culture influencing wisdom capital
Going organic doesn’t happen overnight. But with disciplined and focused use, strategies like these can help your business achieve growth without the nasty side effects of more artificial options.